MAY 2017 PROFESSIONAL EXAMINATIONS

FINANCIAL REPORTING (PAPER 2.1)

CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

EXAMINER’S GENERAL COMMENTS

The general performance of most of the candidates was below average. It showed that
they were not prepared and ready for the examination. They showed lack of
understanding of the International Financial Reporting Standards and basic double
entry principles. Candidates with high understanding of the Accounting Standards
scored high marks especially in questions two and five. The orderly and logical
presentation of answers continued to be a challenge to most candidates.

STANDARD OF THE PAPER

The standard of the questions was good but could not be compared to those of the
earlier diets administered in terms of volume of adjustments required. The questions
covered all the relevant sections of the syllabus. All the questions reflected the
weighting of the topics in the syllabus, and the mark allocations followed a similar
pattern in the previous exams.

Questions one, three and four were without much complications. Questions 2 and 5
(c) and (d) were on the Accounting Standards and the volumes of work required were
commensurate with the allotted time and marks.
The questions were not too loaded except questions four and five. For instance, in
question four, the number of ratios to be computed and commented on for a 15 mark
question was too loaded. There were no ambiguities or typing errors noted in the
paper.

PERFORMANCE OF CANDIDATES
The general performance of the candidates was far below average. About 80% of the
candidates scored less than 35% of the total marks while a candidate scored as low as
2%. The poor performance could be attributed to inadequate preparation by
candidates, or the low standard achieved in their previous levels of studies. A few
excellent candidates scored more than 70% of the total marks.

The high level of performance by candidates was concentrated in Kumasi, Cape Coast
and a few in Accra. The low performers were concentrated in the rest of the regional
centres including Accra where most of the candidates were.

NOTABLE STRENGTHS AND WEAKNESSES OF CANDIDATES

• Candidates who prepared adequately and were ready for the examinations scored
above 50% and a few scored more than 70% of the total marks.
• The candidates’ strengths were in the preparation of the Consolidated Statement of
Financial position in question one, the Statement of Cash Flow in question three, and
Ratio analysis in question four. These are areas which any serious candidate would
not like to ignore while preparing for the exams.

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• Suggested areas in which such strengths can be enhanced include the International
Financial Reporting Standards.
• The general weaknesses shown were in respect of either lack of preparation or the
background of most of the candidates entering the examinations at this level.
• The weaknesses were widespread as could be seen in the general performance.
• The reasons for the weaknesses shown were in respect of lack of preparation and
the basic foundational knowledge for most of the candidates entering the
examinations at this level.

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QUESTION ONE

Ghanbetter is 90% subsidiary of Asonbata that was acquired one year ago for GH¢4billion
when the retained earnings of Ghanbetter were GH¢800 million. Below are the financial
statements of the companies.

Statement of Profit or Loss for the year ended 31 December, 2016

Asontaba Ghanbetter
GH¢'million GH¢’million
Revenue 20,000 4,000
Cost of sales (12,000) (2,000)
Gross profit 8,000 2,000
Distribution cost (2,100) (300)
Administration (1,400) (500)
Operating profit 4,500 1,200
Exceptional gain Nil 580
Investment income 90 Nil
Finance costs (600) (150)
Profit before tax 3,990 1,630
Tax (700) (130)
Profit for the year 3,290 1,500

Statement of Financial Position as at 31 December, 2016

Asontaba Ghanbetter
GH¢'million GH¢'million
Investment in Ghanbetter 4,000 -
Other Assets 20,000 5,000
24,000 5,000

Shared Capital (GH¢ 1) 5,000 1,000

Retained Earnings 15,690 2,200
Equity 20,690 3,200

Liability 3,310 1,800

24,000 5,000

Additional information:
i) During the year Asonbata sold goods to Ghanbetter for GH¢100 million. These goods were
sold at a margin of 20% and one quarter remained in inventory at the year-end.

ii) During the year Ghanbetter sold goods to Asonbata for GH¢180 million. These goods were
sold at a mark-up of 50% and one half remained in the inventory at the year -end.

iii) At the year-end there were no outstanding inter-company current account balances.

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iv) At the date of acquisition the fair value of Ghanbetter’s net assets were equal to their
carrying value with the exception of an item of plant that had a fair value of GH¢200 million
in excess of its carrying value and a remaining useful life of four years.

v) Goodwill is to be calculated using the proportionate basis. An impairment review at the

year-end reveals that no impairment loss arose.

vi) Both companies have paid a divided during the year. The dividend distributed by Asonbata
was GH¢200 million and that of Ghanbetter GH¢100 million. The investment income that
Asonbata has recognised is the dividend received from Ghanbetter Shortly before the year-
end.

Required:
Prepared the Consolidated Statement of Financial Position, Statement of Changes in
Equity, and Consolidated Statement of Profit or Loss for Asonbata for the year ended 31
December, 2016. (20 marks)

QUESTION TWO

a) Akakpo Ltd obtained a license free of charge from the government to dig and operate a
gold mine. Akakpo Ltd spent GH¢6 million digging and preparing the mine for operation
and erecting buildings on site. The mine commenced operations on 1 September 2014. The
license requires that at the end of the mine’s useful life of 20 years, the site must be
reclaimed, all buildings and equipment must be removed and the site landscaped. At 31
August 2015, Akakpo Ltd estimated that the cost in 19 years’ time of the removal and
landscaping will be GH¢5 million and its present value is GH¢3 million.

On 31 October 2015, there was a massive earthquake in the area and Akakpo Ltd’s mine
shaft was badly damaged. It is estimated that the mine will be closed for at least six months
and will cost GH¢1 million to repair.

Required:
i) Demonstrate how Akakpo Ltd should record the cost of the site reclamation as at 31 August
2015 in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
(3 marks)

ii) Explain how Akakpo Ltd should treat the effects of the earthquake in its financial
statements for the year ended 31 August 2015 in accordance with IAS 10 Events after the
Reporting Period. (2 marks)

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b) The following costs were incurred in 2016 in the design and construction of a new office
building over a nine-month period during 2016:
GH¢000
Feasibility study 8
Architects' fees 100
Site clearance (by external demolition professionals) 80
Construction materials 600
Cost of own inventories used in the construction
(net realisable value if sold outside the company GH¢24,000) 30
Internal construction staff salaries during period of construction 360
External contractor costs 2,400
Income from renting out part of site as storage depot
during early phase of construction (12)
3,566
Required:
In accordance with IAS 16 Property, plant and equipment, calculate the amount that
should be capitalised as property in the financial statements for the year ending 31
December 2016. (4 marks)

c) The draft financial statements for the year ended 31 March 2015 for Kobby Ltd include
the following:
GH¢000
Statement of comprehensive income (extract)
Income tax expense 850

Notes to the accounts:

Over provision for the year to 31 March 2014 (50)
Estimate of tax due for the year to 31 March 2015 700
Increase in deferred tax provision for the year to 31 March 2015 200
850
Statement of cash flows (extract)
Tax paid in the year to 31 March 2015 600

Required:
i) Explain how deferred tax arises. (2 mark)
ii) Identify the most likely reason for the increase of GH¢200,000 in the deferred tax
provision for the year to 31 March 2015. (2 marks)
iii) Explain what the over provision of GH¢50,000 in the income statement represents.
(2 marks)

d) Bawaleshie Ltd controls the following financial assets at its reporting date of 31 January
2017:
i) An investment in the equity shares of Obojo Ltd was purchased during April 2016 for
GH¢2.6 million. The fair value of this investment at 31 January 2017 was GH¢2.8 million.
Bawaleshie Ltd decided at the date of purchase to recognize any fair value gains and losses
through other comprehensive income. (2 marks)

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ii) An investment in a bond issued by Shiashie Ltd on 1 February 2016. This bond cost GH¢10
million (equal to its par value) and entitles Bawaleshie Ltd to 8% interest per annum on the
anniversary of the bond’s issue. The principal is to be returned on 31 January 2021. It is
the intention of Bawaleshie Ltd to retain the bond in order to collect the contracted cash
flows on the due dates. (3 marks)

Required:
Recommend how the above financial assets should be accounted for at 31 January 2017 in
accordance with the requirements of IFRS 9 Financial Instruments.

(Total: 20 marks)

QUESTION THREE

The following information has been taken from the financial statements of Haruna Ltd, a listed
company for the year ended 31 March 2017.

Statement of Profit or Loss and Other Comprehensive Income (extracts) for the year
ended 31 March, 2017.
GH¢’000
Profit before interest and tax 981
Finance costs (108)
Profit before tax 873
Income tax expense (305)
Profit for the year 568
Other Comprehensive income
Revaluation surplus on property, plant and equipment 418
Total comprehensive income 986

Statements of Financial Position as at 31 March

2017 2016
Assets GH¢’000 GH¢’000
Non-current assets:
Property, plant and equipment 11,250 10,500
Intangibles 500 452
11,750 10,952
Current assets:
Inventories 840 1,125
Trade and other receivables 260 210
Investments 38 18
Cash and cash equivalents 5 30
1,143 1,383
Total assets 12,893 12,335

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 Equity and Liabilities
Equity
Ordinary share capital 6,000 5,250
Share deals account 1,800 1,425
Revaluation surplus 750 356
Retained earnings 2,011 3,369
10,561 10,400
Non-current liabilities:
Preference share capital (redeemable) 760 600
Current liabilities:
Trade and other payables 222 210
Taxation 600 525
Ordinary dividend payable 750 600
1,572 1,335
Total equity and liabilities 12,893 12,335

Statement of Changes in Equity for the year ended 31 march 2017 (Extract)
Retained Revaluation
Earnings Surplus
GH¢’000 GH¢’000
Balance at 1 April 2016 3,369 356
Dividends declared (1,950)
Total comprehensive income for the year 568 418
Transfer from revaluation surplus to retained earnings 24 (24)
Balance as 31 March 2017 2011 750

The following additional information is relevant:

i) During the year Haruna Ltd issued both ordinary shares and redeemable preference shares
for cash.

ii) Investments classified as current assets are held for the short term and are readily
convertible into the stated amounts of cash on demand.

iii) During the year, Haruna Ltd sold plant and equipment with a carrying amount of
GH¢840,500 for GH¢900,000. Total depreciation charges for the year amounted to
GH¢1,100,000. Plant costing GH¢50,000 was purchased on credit. The amount is included
within trade and other payables.

iv) Trade and other payables include accrued interest of GH¢5,000 as at 31 March 2017 (2016:
GH¢10,000).

v) Intangibles relate to development costs capitalised in accordance with IAS 38 Intangible

Assets. Costs amounting to GH¢70,000 were capitalised during the year.

Required:
Prepare a Statement of Cash Flows for Haruna Ltd for the year to 31 March 2017 in
accordance with IAS 7 Statement of Cash Flows. (20 marks)

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QUESTION FOUR
The following information has been extracted from the recently published accounts of
Diamond Ltd and Shine Ltd.

Statement of profit or loss for the year ended 31 December 2016

Diamond
Ltd Shine Ltd

Notes GH¢’000 GH¢’000

Revenue 1 6,950 4,900

Operating profit 1 2,100 1,780

Interest 2 (1,059) (890)
Profit before taxation 1,041 890

Income tax expense (750) (320)

Profit for the year 291 570

Statement of financial position as at 31 December 2016

Diamond
Ltd Shine Ltd

Notes GH¢'000 GH¢'000

Assets
Non-current assets
Property plant and equipment 5,180 4,772
Current assets
Inventory 465 305
Receivables 3 1,160 815
Cash at bank and in hand 1,240 908
2,865 2,028
Total assets 8,045 6,800

Equity and liabilities

Equity
Share capital (GH¢1 ordinary shares) 3,050 3,140
Retained earnings 2,450 1,805
5,500 4,945
Non-current liabilities
21% loan notes 1,380 1,250
Current liabilities 4 1,165 605
Total liabilities 2,545 1,855
Total equity and liabilities 8,045 6,800

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 Notes (to the accounts)
Diamond
Ltd Shine Ltd
GH¢'000 GH¢'000
1) Sales Revenue and Profit
Sales revenue 6,950 4,900
Cost of sales (3,500) (2,200)
Gross profit 3,450 2,700
Administration/distribution expenses (1,350) (920)
Operating profit 2,100 1,780

Depreciation charged 380 190

2) Interest GH¢'000 GH¢'000

Amount payable on bank overdrafts 545 410
Amount payable on loan stock 660 570
1,205 980
Receivable on short term deposits 146 90
Net payable 1,059 890

3) Receivables GH¢'000 GH¢'000

Amounts falling due within one year
Trade receivables 850 670
Prepayments and accrued income 310 145
1,160 815

4) Current Liabilities GH¢'000 GH¢'000

Trade payables 450 220
Accruals and deferred income 285 190
Corporate taxes 430 195
1,165 605

GH¢'000 GH¢'000
5) Dividends Paid 820 550

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The following are the latest industry average ratios:

Industry
average
Name of ratio
1) Profit margin 35.0%
2) ROCE 30.0%
3) Return on equity 20.0%
4) Current ratio 2.50
5) Quick ratio 2.00
6) Interest cover 2.50
7) Debt to equity 45%
8) Accounts receivable collection period 30 days
9) Accounts payable payment period 45 days
10) Inventory turnover period 40 days

Required:
a) Calculate comparable ratios (to two decimal place where appropriate) for the two
companies. All calculations must be clearly shown.

b) As the Financial Controller of Shine Ltd, write a report to the Managing Director analyzing
the performance of your company, comparing the results against that of Diamonds Ltd (a
key competitor) and against the industry average using the following measures:
 Profitability
 Liquidity
 Gearing
 Efficiency. (15 marks)

QUESTION FIVE

a) Compare and contrast Hire Purchase and Lease as a mode of acquiring an asset. (3 marks)

b) OTL Ltd commenced business on 1 January 2015. The head office is in Ghana and there is
a branch in Nigeria. The currency unit of Nigeria is the Naira (₦).
Head Office Books Nigeria Branch Books
Dr Cr Dr Cr
GH¢ GH¢ ₦ ₦
Branch account 65,280
Balances at bank 10,560 1,056,000
Creditors 21,120 1,478,400
Property, plant and equipment (NBV) 39,600 2,323,200
Head Office 5,068,800
Profit or loss account (Net profit for the year) 52,800 1,267,200
Issued share capital 86,400
Inventory 26,400 1,900,800
Trade receivables 18,480 _______ 2,534,400 ______
160,320 160,320 7,814,400 7,814,400

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 Additional Information:
The trial balance of the head office was prepared before any entries had been made in
respect of any profits or losses of the branch. Remittances from head office to branch and
from branch to head office were recorded in the books at the actual amounts paid and
received.

The rates of exchange were:

On 1 January 2015 ₦80 = GH¢1
Average rate for year 2015 ₦70.4= GH¢1
On 31 December 2015 ₦64 = GH¢1

Required:
i) Prepare the Trial Balance of the Nigeria branch as at 31 December 2015, in Ghana cedi;
ii) The closing entries, as at 31 December 2015, in the branch account in the books of the head
office; and a summary of the Statement of Financial Position of OTL Ltd as at 31 December
2015. (12 marks)

c) Generally there are advantages of global harmonisation of financial reporting standards to

countries around the world including Ghana.

Required:
Identify THREE advantages and THREE disadvantages of International Harmonisation
of accounting standards to multi-national companies operating in Ghana. (6 marks)

d) The conceptual framework includes the measurement bases of the elements of the financial
statements together with recognition criteria for them.

Required:
Explain the FOUR bases of measurement used in the financial statements. (4 marks)

(Total: 25 marks)

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MARKING SCHEME

QUESTION ONE

ASONTABA

W1 Group Structure

Asontaba

Parent’s interest 90% The acquisition was one year ago and so
NCI 10% there will be no need to time apportion
the results of Ghanbetter
Ghanbetter

Unsold inventory at the year-end Gross profit margin

(1/4 × GH¢100m) × 20% = GH¢5m

Unsold inventory at the year-end Gross profit margin

(1/2 × GH¢180m) × 50/150 =GH¢30m

W2 Net Assets

At Post-
At year-end
acquisition acquisition
Profits
GH¢million GH¢million
GH¢million
Share Capital 1,000 1,000
Retained earnings 800 2,200 1,400
Fair value adjustment 200 200
Depreciation (1/4× 200) (50) (50)
Less the purp (180m X1/2) (30)
. . (30)
X50/150)subsidiary is the seller)
Total 2,000 3,320 1,320

OR
Post-acquisition profits = 3320-2,000 = GH¢1.32 billion

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W3 Goodwill GH¢million
FV of parent's investment 4,000
Net assets at acquisition w2 (2,000 x 90%) (1,800)
2,200
OR
FV of parent's investment 4,000
NCI at acquisition - as a proportion of net
(10% × 2,000) 200
assets
Less the subsidiary's net assets at acquisition 2,000
Goodwill at acquisition - attributable to the parent 2,200
Less impairment loss nil
Goodwill at the reporting date 2,200

W4 NCI GH¢million

NCI at acquisition as a proportion of net assets (10% × 2,000) 200

Plus the NCI% of the subsidiary's post-acquisition
(10% × 1,320) 132
profits
NCI at the reporting date 332
OR
NCI at acquisition as a proportion of net assets at
(10% × 3,320) 332
reporting

W5 Group retained earnings GH¢million

Parent’s retained earnings 15,690

Less the PURP (parent is seller) 5
Plus the parent's % of the post-acquisition profits (90% × 1,320) 1,188
16,873

W6 Assets

Assets GH¢million
Parent 20,000
Subsidiary 5,000
Fair value adjustment 200
less depreciation (50)
Less PURP (parent is seller) (5)
Less PURP (subsidiary is seller) (30)
25,175
NB: since the question did not provide details of current assets, all adjusting relating to current
assets (.i.e. PURP) will me made direct on assets.

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W7 Cost of Sales

Cost of sales GH¢million

Parent 12,000
Subsidiary 2,000
less the inter-company (100)
less the inter-company (180)
Plus the PURP (parent is
seller) 5
Plus the PURP (subsidiary
is seller) 30
Plus the additional
depreciation 50
13,805
W8 Profit for the year attributable to the
NCI GH¢million

NCI % of the subsidiary's profits

(10% × 1,500) 150
less the NCI % of depreciation on FVA
(10% × 50) (5)
less the NCI % of the PURP (subsidiary is
seller) (10% × 30) (3)
142

Asontaba Group
Statement of Financial Position as at 31 December, 2016
GH¢million
Goodwill w3 2,200
Assets w6 25,115
27,315

Share capital (GH¢1) 5,000

Retained earnings w5 16,873
NCI w4 332
Equity 22,205

Liabilities (3,310 + 1,800) 5,110

27,315

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 Asontaba Group
Statement of Profit or Loss account for the year ended 31 December, 2016
GH¢million
Revenue (20,000 + 4,000 less inter-company
100 and less inter-company 180) 23,720

Cost of Sales w7 (13,805)

Gross profit 9,915
Distritbution costs (2,100 + 300) 2,400
Administration expenses (1,400 + 500) 1,900
Operating profit 5,615
Exceptional gain (0 + 580) 580
investment income (90 less inter-company 90) nil
Finance costs (600 + 150) 750
Profit before tax 5,445
Tax (700 + 130) 830
Profit for the year 4,615

Attributable to the parent Balancing figure 4,473

Attributable to the
subsidiary w8 142
Profit for the year 4,615

Asontaba Group
Statement of Changes in Equity for the year ended 31 December 2016
Share Total
Retained NCI
Capital Equity
Earnings
GH¢m GH¢m GH¢m GH¢m
Opening balance 5,000 12,600 nil 17,600
Acquisition of a subsidiary 200 200
Profits for the year 4,473 142 4,615
Less dividends - 200 (10) (210)
Closing balance 5,000 16,873 332 22,205

GH¢m
Opening retained earnings of
Balancing figure 12,600
Asontaba
Plus the profit for the year Per statement of profit or loss 3,290
Less dividends Per note 6 200
Per statement of financial
Year-end retained earnings 15,690
position
(20 marks spread evenly using ticks)

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EXAMINER’S COMMENTS
Most candidates scored less than 50% of the total marks. The Consolidated Financial
Position could have been a bonus question and candidates could have scored the
maximum marks but most of them failed woefully. The preparation of the Statement
of Changes in Equity, the calculation of the Net Assets, Goodwill and Non-Controlling
Interest were poorly handled. However, a few candidates scored the maximum marks,
confirming their preparedness.

QUESTION TWO

a)

i) IAS 37 Provisions, contingent liabilities and contingent assets requires that

future costs of reinstatement be provided for as soon as they become an
unavoidable commitment. The mine’s license requires the work to be done, so
there is a commitment as soon as the mine starts operations. The present value
of the full cost must be provided for. GH¢ 3 million will be credited to
provisions and added to the cost of the non-current asset. (3 marks)

ii) The earthquake occurred after the end of the accounting period. Assets and
liabilities at 31 August 2014 were not affected. The earthquake is indicative of
conditions that arose after the reporting period and does not give any further
evidence in relation to assets and liabilities in existence at the reporting date.
Therefore according to IAS 10 Events after the reporting period it will be
classified as a non-adjusting event after the reporting period. The cost of the
repairs will be charged to the Statement of comprehensive income in the period
when it is incurred. Due to the impact on Akakpo Ltd, i.e. closure and loss of
earnings for 6 months, the earthquake and an estimate of its effect will need to
be disclosed by way of a note in Akakpo Ltd’s financial statements for the year
ended 31 August 2015. (2 marks)

b) GH¢’000
Feasibility study – expensed by analogy with
SIC-32 para 2(a)/9(a) in accordance with IAS 8 para 11(a) -
Architects’ fees (IAS 16 para 17(b)) 100
Site clearance (IAS 16 para 17(b)) 80
Construction materials 600
Cost of own inventories used in the construction
(IAS 2 is applied first before use on the project) 24
Internal construction staff salaries (IAS 16 para 17(a)) 360
External contractor costs 2,400
Income from renting out part of the site as storage depot
during early phase of construction (IAS 16 para 21) -
3,564
(4 marks)

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c)
i) Deferred tax is the estimated future tax consequences of transactions and events
that have been recognized in the financial statements of the current and previous
periods. Deferred tax arises due to the temporary differences between the
accounting profit and the taxable profit. The temporary differences cause the
carrying value of some items in the statement of financial position to be different
from their tax base (the amount recognized for tax calculation). (2 marks)

ii) Kobby Ltd’s statement of comprehensive income shows an increase in deferred

tax, this suggests that temporary differences in the year to 31/3/2015. The main
reason was probably an increase in non-current assets causing the tax
depreciation to increase more than the accounting depreciation for the year to
31/3/2015, thus causing the increase of GH¢200,000 in deferred tax provision.
(2 marks)

iii) Current tax is the estimated amount of corporate income tax payable on the
taxable profits of the entity for the period. The amount of current tax is accrued
in the financial statements and carried forward as a current liability to the next
accounting period when it will be paid. When the tax is paid there will usually
be a difference between the amount paid and the amount accrued. If the amount
paid is less than the amount accrued there will be an over provision of income
tax. The amount over provided will be an adjustment to the income tax expense
in the following period. In Kobby Ltd, the current tax estimate for year to 31
March 2014 was GH¢650,000, the statement of cash flows shows that GH¢600,000
was paid in the following period leaving a balance of GH¢50,000 over provided.
(2 marks)
d)
(i) The investment is revalued to fair value at the reporting date. A gain of
GH¢200,000 results. This is recognised in other comprehensive income, as the
entity made an election to do so at the date of purchase.
31 Jan 2017 Dr Financial assets GH¢200,000
Cr Other comprehensive income / reserves GH¢200,000
(Fair value gain on investment in shares of another entity)

(ii) As the cash flows due to Bawaleshie under the terms of the bond consist solely
of interest and principal, the amortised cost method should be applied. Interest
earned during the year ended 31 January 2017 is GH¢800,000 (8% of GH¢10m).
As this is not payable until the anniversary of the bond’s issue (1 February 2017),
an accrual must be made for this amount. The fair value of the bond at 31 January
2017 is therefore irrelevant.
31 Jan 2017 Dr Interest receivable (current asset) GH¢800,000
Cr Profit or loss GH¢800,000
(Interest accrued to Bawaleshie Ltd on bond investment)
(5 marks)

(Total: 20 marks)

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EXAMINER’S COMMENTS
Most of the candidates could not apply their understanding of the issues raised in the
various IFRS statements given. This resulted in the loss of vital marks. Some of them
never attempted the question.
a) i) Most of the candidates could not apply IAS 37 to record the cost of the site
reclamation.
ii) Similarly, candidates could not explain the treatment of Events after the Reporting
Period in the Financial Statements.

b) Only a few candidates were able to score the maximum marks in calculating the
amount to be capitalised as the cost of the property in the financial statement.

c) i) Only a few candidates were able to explain effectively deferred tax and how it
could come about.
ii) Most of the candidates could not identify the probable reasons of the increase of
GH¢800,000 in the year as increase in non-current assets resulting in an increase in the
Capital Allowances as compared to the depreciation in the financial statement.
iii) The explanation as to how the over provision of GH¢50,000.00 came about and
what it represented could not be explained.

d) i) This approach to this sub question was above average. Candidates were able to
discuss how to account for the gain in the books.
ii) Most of the candidates passed the correct entries on the interest earned by crediting
other Income and debiting Interest Receivable. A few however wrongly debited the
Investment Account.
The recording of the above two transactions by a journal entry with narrations could
have earned the candidates the maximum marks.

Page 18 of 29
QUESTION THREE

Haruna Ltd
a) Statement of cash flows for the year ended 31 March 2017
GH¢’000 GH¢’000
Cash flows from operating activities
Profit before tax 873
Finance cost 108
Depreciation charge 1,100
Amortisation charge (W4) 22
Profit on disposal of PPE (900-840.5) (59.5)
Decrease in Inventories (1,125-840) 285
Increase in trade and other receivables(210-260) (50)
Increase in trade and other payables (W7) 33
Cash generated from operations 2,245
Interest paid (W2) (113)
Income tax paid (W1) (230)
Net cash from operating activities 1,952.5

Cash flows from investing activities

Purchase of property, plant and equipment (W3) (2222.5)
Purchase of intangibles (70)
Proceeds from sale of property, plant and equipment 900
Net cash used in investing activities (1,442.5)

Cash flow from financing activities

Proceeds from issue of ordinary share capital 1,125
(6,000+1,800)-(5,250+1,425)
Proceeds from issue of redeemable preference share 160
(760-600)
Dividends paid (W6) (1,800)
Net cash used in financing activities (515)
Net increase in cash and cash equivalents (5.0)
Cash and cash equivalents at beginning (30+18) 48
Cash and cash equivalents at close (38+5) 43

W1 Income Tax
GH¢’000 GH¢’000
Cash paid 230 Bal b/d 525
Bal C/d 600 Income statement 305
830 830

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W2 Finance Cost
GH¢’000 GH¢’000
Cash 113 Bal b/d 10
Bal c/d 5 Income Statement 108
118 118

W3

PPE
GH¢ʻ000 GH¢ʻ000
Bal b/d 10,500.0 Disposals 840.5
Revaluation surplus (W5) 418.0 Income statement 1,100.0
Purchased on credit 50.0 Bal b/d 11,250.0
Cash 2,222.5 -
13,190.5 13,190.5
W4
Intangibles
GH¢ʻ000 GH¢ʻ000
Cash 70 Bal b/d 500
Bal b/d 452 Income statement 22
522 522
W5
Revaluation Surplus
GH¢ʻ000 GH¢ʻ000
Retained earnings 24 Bal b/d 356
Bal c/d 750 PPE 418
774 774
W6
Ordinary Dividends
GH¢ʻ000 GH¢ʻ000
Cash 1,800 Bal b/d 600
Bal c/d 750 Retained earnings 1,950
2,550 2,550

W7 Trade and other payables (excluding interest accrual and payables in respect of
PPE)
Opening GH¢210,000 – GH¢10,000 = GH¢200,000
Closing GH¢222,000 – GH¢5,000 – GH¢50,000 = GH¢167,000
Increase = GH¢33,000
(20 marks evenly spread using ticks)

EXAMINER’S COMMENTS
The approach to the preparation of a Statement of Cash Flows was far below
expectation. The question was straight forward with a few adjustments. This is an area
candidates have not been tested for some time.

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QUESTION FOUR

a) Diamond Ltd and Shine Ltd

i. Ratios
Diamond Shine
Name of ratio Formula
2,100 x100 1,780x100

PBIT/revenue x 6,950 30.22% 4,900 38.16%

Profit margin 100%
2,100 x100

6,880
1,780*100
32.65% 6,195 30.19%
ROCE PBIT/CE x 100%
PAT &
Div/Equity
shareholders’ 291/5,500 5.29% 570/4,945 11.53%
Return on equity funds
2,865/1,165 2.46 2,028/605 3.35
Current ratio CA/CL
(2,028 -
(CA- (2,865 - 465)/1,165 2.06 305)/605 2.85
Quick ratio Inventory)/CL
1,780 /980
2,100/1,205
Or
Or 2,100/660 1780/570

PBIT/Interest 3.18 1.86 3.12 1.91

Interest cover charges
1,380/5,500 25.09% 1,250/4,945 25.28%
Debt to equity Debt/Equity
Accounts
receivable Trade 670/4,900 x
collection period receivables/sales 850/6,950 x 365 44.64 365 49.91
(days) x 365
Accounts payable Trade 220/2,200 x
payment period payables/cost of 450/3,500 x 365 46.93 365 36.50
(days) sales x 365
Inventory 305/2,200 x
turnover period Inventory/cost 465/3,500 x 365 48.49 365 50.60
(days) of sales x 365
(6 marks spread evenly using ticks)

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 ii. Report to the Managing Director
To: Managing Director

From: Financial Controller

Subject: Analysis of performance for the year 2015

This report should be read in conjunction with the appendix attached which shows
the relevant ratios.
(1 mark)
Profitability
Profit margin is one of the key indicators used to evaluate a company's performance
as this margin calculates a company's net income as a percentage of the company's
sales. Several factors directly contribute to the change in a company's net profit
margin. A high profit margin shows that a company can convert sales into profits. The
net profit margin also considers all of the costs associated with the sale of the products.
Profit margin was better than that of our competitor Diamond Ltd as well as the
industry average. This suggest that if we increase sales, there will be more profits for
the company.

Return on Capital Employed is very useful for companies that require large amounts
of capital to facilitate production, otherwise known as capital-intensive industries.
Return on capital employed was bit lower than that of Diamond just approximating
the industry average .Options available to the company to improve on its return on
capital employed (ROCE) ratio include reducing costs, increasing sales, and paying
off debt or restructuring financing.

Return on equity (ROE) is a measure of profitability that calculates how many Ghana
cedis of profit a company generates with each Ghana cedi of shareholders' equity.
ROE compared to the industry average of 20% was quite lower. This is bad even
though it’s significantly higher than that of Diamond. Return on equity can be
improved if asset turnover, financial leverage and profit margins are properly
managed by the company.
(2 marks)

Liquidity
The current and quick ratios performed better than the industry and that of Diamond.
The higher the current ratio, the more capable the company is of paying its obligations,
as it has a larger proportion of asset value relative to the value of its liabilities. This
suggests that Shine has no short term liquidity challenges and should have no
difficulty in paying short term debts as they fall due.
(2 marks)
Gearing
Gearing focuses on the capital structure of the business – that means the proportion
of finance that is provided by debt relative to the finance provided by equity (or
shareholders). However, it focuses on the long-term financial stability of a business.
Our interest cover although slightly below the industry average it is marginally higher

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than that of Diamond. This also shows the company’s ability to adequately settle
interest charges.

The debt to equity ratio compares favourably with Diamond and is significantly
lower than industry average. The higher the level of borrowing (gearing) the higher
are the risks to a business, since the payment of interest and repayment of debts are
not "optional" in the same way as dividends. However, gearing can be a financially
sound part of Shine's capital structure particularly if the business has strong,
predictable cash flows.
(2 marks)

Efficiency
Average collection period is worse off than both Diamond’s and the industry average.
Our longer credit days is yet to translate into higher sales for us compared to
Diamond. More effort is required at the Credit Control Unit to reduce the collection
period.

Although we collect from our debtors latter than Diamond and industry, we pay our
suppliers earlier than both. We need to negotiate better credit terms form our
suppliers to match the industry norm. The inventory days on hand is higher than
industry and Diamond’s. There is the possibility of having some obsolete items in
store. This high level of inventory has been financed by increased overdraft which
may reduce if the inventory levels can be managed down.
(2 marks)

Signed: Financial Controller.

(Total: 15 marks)

EXAMINER’S COMMENTS
This could have been a bonus question but as usual a few candidates handled the
question as if it was their first time of coming across a question on ratio analysis. A
few stated the formulae correctly but could not identify the figures from the financial
statement given.

On the presentation of the report, most of them compared the performance of the two
companies and related the performance to the Industry Average. A few others ignored
the requirement of rounding off to two decimal places.

Page 23 of 29
QUESTION FIVE

a) Hire Purchase and Leasing

 An arrangement to finance the use of the asset, in which one party pays
consideration to the other party in periodical installments, is known as Hire
purchasing. Leasing is a business deal in which one party buys the asset and grants
the other party to use it, in return for lease rentals.
 In Hire Purchasing, the ownership is transferred to the hirer only if he pays the
outstanding installments. On the other hand, in a finance lease, the lessee gets the
option to buy the asset at the end of the term by paying a nominal amount, but in
operating lease, there is no such option available to the lessee.
 Leasing is governed by International Financial Reporting Standard (IFRS)- IAS 17,
IFRS 16 whereas there is no specific accounting standard for Hire Purchase.
 Hire purchase is a must in hire-purchasing but not in leasing.
 The duration of leasing is longer than hire purchase.
 The installment paid in hire purchasing includes the principal amount and interest.
In contrast to leasing where the lessee has to pay the cost of using the asset only.
(Any 3 points for 3 marks)
b)
i)
Nigeria Branch
Trial Balance as at 31 December 2015
Dr Cr

₦ Rate GH¢ GH¢

Balances at bank 1,056,000 64 16,500
Creditors 1,478,400 64 23,100
Fixed Assets purchased on 1/01/2014 2,323,200 80 29,040
Head Office 5,068,800 Actual 65,280
Profit or loss account (Net profit for the 1,267,200 70.4 18,000
year)
Inventory 1,900,800 64 29,700
Trade receivables 2,534,400 64 39,600
Exchange Difference _____ 8,460
114,840 114,840

ii)
Books of Head Office
GH¢ GH¢
Bal b/d 65,280 Bal c/d 91,740
Exchange Difference 8,460
Net Profit 18,000 ______
91,740 91,740

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iii)

Statement of financial position as at 31 December 2015

Non-current assets GH¢ GH¢
Property, plant and equipment (39,600+29,040) 68,640
Current Assets
Inventory (26,400+29,700) 56,100
Trade receivables (18,480+39,600) 58,080
Bank (10,560+16,500) 27,060
141,240
Less current liabilities
Trade payables (21,120 +23,100) (44,220) 97,020
165,660
Financed by:
Capital 86,400
Reserves (52,800+18,000) 70,800
Exchange difference 8,460 79,260
165,660
(12 marks to be spread evenly using ticks)

b) Alternative solution
i)
Nigeria Branch
Trial Balance as at 31 December 2015
Dr Cr

₦ Rate GH¢ GH¢

Balances at bank 1,056,000 64 16,500
Creditors 1,478,400 64 23,100
Fixed Assets 2,323,200 64 36,300
Head Office 5,068,800 Actual 65,280
Profit or loss account (Net profit for the 1,267,200 70.4 18,000
year)
Inventory 1,900,800 64 29,700
Trade receivables 2,534,400 64 39,600
Exchange Difference
15,720
122,100 122,100

ii)
Books of Head Office
GH¢ GH¢
Bal b/d 65,280 Bal c/d 99,000
Exchange Difference 15,720
Net Profit 18,000 ______
99,000 99,000

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iii)

Statement of financial position as at 31 December 2015

Non-current assets GH¢ GH¢
Property, plant and equipment (39,600+36,300) 75,900
Current Assets
Inventory (26,400+29,700) 56,100
Trade receivables (18,480+39,600) 58,080
Bank (10,560+16,500) 27,060
141,240
Less current liabilities
Trade payables (21,120 +23,100) (44,220) 97,020
172,920
Financed by:
Capital 86,400
Reserves (52,800+18,000) 70,800
Exchange difference 15,720 86,520
172,920
(12 marks to be spread evenly using ticks)

c) Advantages and Disadvantages of International Harmonisation of accounting

standards

Advantages of Harmonization
 The first and most important advantage of harmonization of reporting standards
is to achieve comparability in financial statements. Due to different sets of
financial reporting standards, the way financial statements prepared and
presented are different from each other which make it complicated to compare
them. This is even more noticeable in multinational companies when they operate
in more than just one country. If international harmonization is achieved, the level
of international comparability also increases making it easier for companies to
prepare the financial statements under one set of rules; investors who understand
the financial statements due to the nature of IFRS and make well thought
investment decisions.

 International Expansion
Moving to a single set of global financial standards would also ease barriers to
expansion for companies. If companies wish to expand overseas today, they need
to consider international costs of compliance, which could mean adopting a
completely new set of accounting records to meet statutory requirements in the
new country. In some cases, this would nearly double the company's accounting
costs. For many small businesses, even the large rewards of moving overseas are
dwarfed by these expansion costs.

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 Central Authoritative Body
From a policy-making standpoint, moving to a single set of global standards puts
rule making into the hands of one body. Currently, accounting standards are set
within each country by each standard-setting body, as well as by an international
group. One set of standards would reduce disagreement between countries and
international regulators, and it might also cut costs. In some countries, businesses
are required to pay reporting fees that go to fund these standard-setting bodies.
While the costs may not affect large companies, they can have a huge impact on a
small business. Moving to a central authoritative body could reduce these costs
drastically.

 There will be increased auditing efficiency and money saving as companies has
to use only one set of reporting standards. This also serves to reduce trade barriers
among countries allowing more access to international capital markets.

 Another advantage worth noting is the consistency to be achieved under IFRS as

it was one of the objectives of IFRS as a single reporting standard. The consistency
also contributes to better understanding between investors, lenders and other
businesses as there will be the nature of predictability in place. Moreover,
companies operating in different countries also can use their expertise and systems
in all countries they are operating due to consistency of the reporting standards.
Another benefit that derives from consistency is the time scale needed to
implement in new countries as there will be no need to learn and adapt to new
country specific rules except minor adjustments.
(Any 3 points for 3 marks)

Disadvantages of Harmonization

 Cultural Differences
One of the criticisms of harmonized accounting standards is that the IASB has
failed to fully take into account the cultural, political and social differences
between countries. This is particularly relevant to their implementation in
developing countries, where language barriers, attitudes toward accounting and
other socio-cultural aspects may affect their interpretation and application. For
example, when the harmonized standards were implemented in Jordan, they were
first translated into Arabic. Even though technical accounting terms have been
well-defined in Arabic, challenges arose when the English terminology was hard
to interpret or used inconsistently and, therefore, difficult to translate accurately.

 Worldwide Acceptance
National accounting standards are highly politicized and there is often a natural
tendency to place the interests of the national economy ahead of those of the global
economy. Private sector businesses and professional accounting bodies also have
a vested interest in accounting practices and financial reporting. Pressure from
these groups to change or reject certain standards can carry a lot of weight with
political decision makers. Adopting international financial standards is met with

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 additional challenges in developing countries. They often lack the resources and
infrastructure to adapt national legal and legislative frameworks in which to house
the standards, making proper implementation difficult.

 International Enforcement
The success of harmonized financial reporting depends on individual
governments enforcing adherence to the international standards once they have
been implemented. In 2008, the French authorities allowed the bank Société
Générale to transfer some of its losses from 2008 to 2007, meaning its financial
statement for 2008 looked much better than the reality. This provoked an
international outcry, not the least from the IASB. When exceptions are made, it
undermines the integrity of the whole system and renders it ineffective.

 Training and Retraining

When a country decides to harmonize with the international standards, its
companies, accountants and auditors need to be retrained in the new standards
and reporting procedures for financial statements. College and university
programs in this field also have to undergo significant changes in order to educate
new people entering the profession. Before any of this can happen, trainers and
professors will require training so they can instruct professionals and students.
This will require the development of new learning materials and curricula, new
examinations for professional licensing and new accounting software and
reporting systems. To further complicate matters, the adoption of harmonized
standards has to be phased in, so for a number of years, two different systems are
in operation. Such a complex transition requires a lot of safety mechanisms to
ensure it achieves uniform results.

 Another disadvantage of harmonization is when there exists different economic

environment as harmonization could be considered useless. If a particular country
has its own practice in place, and even though they adapt to use one of the
international reporting standards, it could be more harmful to the country rather
than make anything good. This is because the irrelevant element of the new
reporting standard may be of no use and therefore may even introduce ambiguity
and complication to that country’s reporting standards.
(Any 3 points for 3 marks)
(6 marks)

d) Measurement bases of elements of Financial Statement

 Historical cost is whereby assets are recorded at the amount of cash or cash
equivalents paid or fair value of the consideration given to acquire them at the time
of their acquisition. Liabilities are recorded at the amounts of proceeds received in
exchange for the obligation, or in some circumstances at the amounts of cash or
cash equivalents expected to be paid to satisfy the liability in the normal course of
business.

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 Current cost whereby assets are carried at the amount of cash or cash equivalents
that would have to be paid if the same or an equivalent asset was acquired
currently, and liabilities are carried at the undiscounted amount of cash or cash
equivalents that would be required to settle the obligation currently.

 Realisable (settlement) value is the amount of cash or equivalents that could

currently be obtained by selling an asset in an orderly disposal. Settlement value
is the undiscounted amounts of cash and cash equivalents expected to be paid to
satisfy the liabilities in the normal course of business.

 Present value is the presented discounted value of the future net cash flows in the
normal course of business.
(4 points explained for 4 marks)

(Total: 25 marks)

EXAMINER’S COMMENTS
a) The approach to the sub question was good. The requirement of “compare and
contrast made a few candidates write a full page for the three marks allocated.
b) The approach was well above average. Only a few candidates did not attempt the
question and also could not apply the correct exchange rates in the translation.
c) The approach was below average. Only a few candidates were able to state the
advantages and disadvantages of International Harmonisation of Accounting
Standards. A few presented their answers using the principles of International Trade.
d) The bases of measurement of the elements of the financial statements were well
handled. Most candidates who attempted it scored the maximum marks. However, a
few stated the bases without any explanation and therefore lost a few vital marks.

CONCLUSION
There was enough evidence to show that candidates understood what was required,
since there were no material deviations. Candidates presented wrong or contrary
answers mainly because they did not know the expected answers, which reflected in
their poor performance.

The academic standard of candidates entering the exams at this level appears to be on
the decline hence the poor performance in the subject. Candidates are therefore
advised not to take the examinations for granted. They should ensure that they have
completed the syllabus and worked through series of questions before registering for
the examinations.

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